Breakup and Default Risks in the Great Lockdown

79 Pages Posted: 27 Nov 2019 Last revised: 7 Sep 2021

See all articles by Giovanni Bonaccolto

Giovanni Bonaccolto

Kore University of Enna - School of Economics and Law

Nicola Borri

LUISS University - Department of Economics and Finance

Andrea Consiglio

University of Palermo - d/SEAS

Date Written: November 15, 2019

Abstract

In this paper, we exploit CDS quotes for contracts denominated in different currencies and with different default clauses to estimate the risk of a breakup of the Eurozone and the propagation of breakup and default risks after the COVID-19 shock. Our main result is that the risk of a Eurozone breakup is significant although, quantitatively, it is not larger than in the period before the COVID-19 shock. In addition, we find that an increase in the redenomination risk in one country is associated with an increase in default premia and bond spreads in other Eurozone countries. Finally, we find that a sizeable fraction of the changes in the cost of insuring against redenomination and default reflects two additional factors: the first captures the insurance cost against a euro depreciation conditional on \re, while the second captures liquidity premia.

Keywords: redenomination risk, CoVaR, elastic net, Covid-19, default risk

JEL Classification: G10, C31, C45, C58

Suggested Citation

Bonaccolto, Giovanni and Borri, Nicola and Consiglio, Andrea, Breakup and Default Risks in the Great Lockdown (November 15, 2019). d/SEAS Working Paper, Available at SSRN: https://ssrn.com/abstract=3487453 or http://dx.doi.org/10.2139/ssrn.3487453

Giovanni Bonaccolto

Kore University of Enna - School of Economics and Law ( email )

Italy

Nicola Borri (Contact Author)

LUISS University - Department of Economics and Finance ( email )

viale Romania, 32
Rome, 00197
Italy

HOME PAGE: http://docenti.luiss.it/borri/

Andrea Consiglio

University of Palermo - d/SEAS ( email )

Viale delle Scienze, edificio 13
Palermo, 90124
Italy

HOME PAGE: http://portale.unipa.it/persone/docenti/c/andrea.consiglio

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